Definition of Book Value per Share of Stock
The book value of a corporation is the amount of its stockholders’ equity. Assuming the corporation does not have preferred stock outstanding, the book value per share of common stock is the amount of the corporation’s stockholders’ equity divided by the number of shares of common stock outstanding on that date. Both the amount of stockholders’ equity and the number of shares of common stock outstanding are reported on the corporation’s balance sheet.
Since a corporation’s stockholders’ equity is the difference between the total amount of assets and the total amount of liabilities as reported on the balance sheet, the corporation’s book value is not the market value of the corporation. Two reasons for the difference are the following:
- Property, plant and equipment, a noncurrent asset section of the balance sheet, reports assets at their original cost less accumulated depreciation. However, the current value of some of these assets may be much greater.
- Some intangible assets such as trade names, patents, customer allegiance, etc. may not be reported on the balance sheet because they were not purchased in a transaction. However, these may be the corporation’s most valuable assets.
Example of Book Value per Share of Stock
If a corporation without preferred stock has stockholders’ equity on December 31 of $12,421,000 and it has 1,000,000 shares of common stock outstanding on that date, the book value per share of common stock is $12.42. This book value is likely to be far different from the market value of a share of the common stock.
